A business cycle refers to the periodic expansion and contraction a company experiences. While the concept often is used in relation to the larger economy, its phases have applications to each particular business or industry. As generally defined, the business cycle has four components -- contraction, recession, expansion and peak. It takes years for the domestic economy to cycle through all four components, but these components can occur on an annual basis for seasonal businesses.

Expansion

In an expansion, the business is on the rise and consumer confidence grows. Companies take the opportunity to expand, incomes generally rise and spending follows suit. Although it may take time for consumers to fully recover the former spending habits that they had to curtail in dark economic times, they are more willing to make major purchases. A business selling appliances, for example, may find its sales increase as customers take advantage of the good times to replace their old refrigerators.

Peak

Peak periods are those where the economy is maximizing its growth and a business is booming. In the larger economy during these periods, consumer confidence peaks, wages and spending rise, and increased profits free up money for business investment and expansion. A business selling holiday ornaments, for example, could expect to see their business peak in December each year, expanding their wares and maximizing their profits to take advantage of seasonal shoppers.

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Contraction

In an economic downturn, businesses stop growing. The inflationary tendencies of the peak period have a dragging effect on sales, and businesses may find themselves with excess capacity both in terms of inventory and in their workforce. In some industries, this follows predictable patterns based on sales. An auto dealer, for example, can expect that the customers he sold a car to today won’t buy another new vehicle tomorrow as well, so a period of peak sales restricts the potential customer base for the following months.

Trough or Recession

A trough witnesses an economy or a business being reduced for an extended period. In a recession, unemployment tends to rise and production decline. Because of the jolt to economic confidence, consumers spend less. In a cyclical business, an owner may choose to wait for better times and minimize expenses as best he can. A store that sells costumes might not close in April if its owner is confident it can make it to Halloween in October, but it likely will cut back on staff and perhaps reduce hours.